How Do Penalties And Free Withdrawals Work On Annuities? – Cravitz Financial & Insurance Solutions

How Do Penalties And Free Withdrawals Work On Annuities?

Video Transcript:

How's it going everybody? It's Ryan here. Okay, so I thought I would record this real quick video, just to explain how the surrender charges and withdrawal provisions work when it comes to deferred annuities, such as a fixed annuity or a fixed index annuity, as an example. Now, when it comes to surrender charge schedules, some products have surrendered charge schedules as short as three years, that's the shortest one I know of anyways. And then other products can be 10 years, some even longer. There's 14 years, there used to be one that was 16 years, I don't really know if there still is, but there can definitely be a broad range of annuities that are available in the marketplace as far as the surrender charge schedule. So let me go and share my screen here with you, and what I'm going to pull up here is, this is just going to be an example of one annuity. Now, again, obviously there's multiple different annuity products in the marketplace, but by going through this, at least you'll understand the big picture on how these things work.

So first off, the one that we're looking at right here has a seven year surrender charge schedule. So, we can see what the penalty would be, the surrender charge, would be in each year if you were to withdraw more than the free withdrawal amount. So, what that means specifically is, let's say that in the very first year, you put $100,000 into this contract, and if you were to withdraw more than the free withdrawal amount, you would have to pay a 9% penalty on the amount that you withdrew. So, in this product, for instance, during the first contract year, 10% of the purchase payments may be withdrawn without an early withdrawal charge. So if you have $100,000 that you put in, you could take out 10% the first year, which is $10,000, no penalty, you get that money free and clear. But if you want to withdrawal an extra thousand dollars instead, let's say you want to withdraw $11,000. $10,000, no penalty, the extra $1,000, you pay a 9% penalty on that $1,000 extra. So 90 bucks would be your penalty there for the year to withdraw that additional money.

Now, over time, you could see the surrender charge schedule declines. So, if you needed to withdraw that money in the fifth year, you're only paying a 5% penalty, or surrender charge, on the amount beyond the free withdrawal amount. Now, a lot of contracts, I would even venture to say, most contracts allow you to withdraw 10% of the amount that's in the contract year by year. Some that 10% is based on the initial premiums that you paid, some is based upon the actual contract anniversary at the most recent contract anniversary. Not all of them allow you to withdraw 10%, some only allow you to withdraw 5%, some don't allow you to withdraw any.

Some that I've seen, well, let you withdraw it, if you don't withdraw the 10% the first year, you could withdraw 20% the second year, there might be an extra fee for that, right? So every contract is going to be a little bit different, but commonly, a lot of them allow you to withdraw 10% the first year. And a lot of these contracts have other provisions attached to them as well. So, for instance, there's a terminal illness provision, and so with this one it says, provided that the diagnosis has rendered more than one year after the contract effective date, up to 100% of the account value can be withdrawn without deduction of an early withdrawal charge if the owner or joint owner is diagnosed by a physician as having a terminal illness with a life expectancy of 12 months or less. So you buy the contract today, one year from today, you get terrible news from the doc, potentially all of this money could be yours free and clear, no penalty.

Also, a lot of these contracts also have something for extended care or long-term care or something like that, so let's read this one. I haven't even read it yet, but this one, it says, "To help ease the strain of certain unforeseen events, an extended care waivers available for no additional charge. If the owner's confined to a nursing home, or other long-term care facility, after the completion of the first contract year, for at least 90 consecutive days, early withdrawal charges may be waived on withdrawals up to a full surrender." So, buy a contract today, a year from today, you're then going into a long-term care facility for 90 days. At that point, you could withdraw this money 100% free and clear is what this is saying right here. So an area of confusion, a lot of times people think that if I'm buying, let's say a seven year, like in this example, deferred annuity, I should not buy it unless I don't need any of that money for the full seven years.

But as you can see, you can take out 10% free withdraw for any reason whatsoever. In this case, you've got the terminal illness and you've got the extended care waivers that could give you that liquidity for those types of health issues and such if you were to need that. Now, you shouldn't necessarily put all your money into an annuity. Anyways, you should have other money that's going to be liquid and such, and perhaps other different types of assets. So you might have an annuity, you might have, a portfolio that has stocks, bonds, mutual funds, ETFs, right? This could just be one type of product within the overall portfolio. So do keep that in mind.

Oftentimes I will find that people that are in their retirement years that are needing income are taking a look at these types of products, because you could get out 10% per year. And we don't want to get into withdrawal rate risk, but typically taking out 10% of the contract every single year, that's a pretty hefty sum year by year. So anyways, there's a lot of various uses to these types of products, but that is how these things do work. Hope that made sense, want to keep it short, if you have any questions for me, let me know. Take care, see you in the next one.

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